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Talking Freight

Accounting for Freight Benefits in Transportation Projects

December 12, 2007 Talking Freight Transcript

Good afternoon or good morning to those of you to the West. Welcome to the Talking Freight Seminar Series. My name is Jennifer Symoun and I will moderate today's seminar. Today's topic is Accounting for Freight Benefits in Transportation Projects. Please be advised that today's seminar is being recorded.

Today we'll have two presenters: Michael Fischer of Cambridge Systematics and Rob Mulholland of ICF International.

Michael Fischer is a Principal at Cambridge Systematics where he directs the firm's freight transportation planning practice. Michael specializes in freight transportation planning, freight and truck modeling, freight data systems, and transportation economics. His recent project assignments have included development of a regional goods movement study for the Greater Vancouver region, development of approaches to financing freight mega-projects in Washington State, analysis of West Coast trade transportation issues and policy alternatives, development of a statewide freight planning vision for Oregon, assistance with the Goods Movement Element of the Southern California Regional Transportation Plan, and several economic policy studies for the FHWA. Michael was the project manager for CS' project to develop a Guidebook for Estimating the Economic Impacts of Large Scale Freight Investments.

Rob Mulholland has over 12 years of experience in economic, regulatory, and public policy analysis in the areas of transportation and energy. He has conducted and directed economic and policy research and analysis across a broad spectrum of transportation issues, including operations assessment, infrastructure delivery, carrier-cost calculation, benefit-cost analysis, railroad merger assessment, freight volume and rate forecasting, and regulatory and contract compliance. Prior to joining ICF, Mr. Mulholland worked for the Federal Highway Administration. He has experience in national policy development, legislation implementation, and regulation writing. Mr. Mulholland has also developed and presented evidence before the Surface Transportation Board in railroad rate reasonableness cases.

I'd now like to go over a few logistical details prior to starting the seminar. Today's seminar will last 90 minutes, with 60 minutes allocated for the speakers, and the final 30 minutes for audience Question and Answer. If during the presentations you think of a question, you can type it into the smaller text box underneath the chat area on the lower right side of your screen. Please make sure you are typing in the thin text box and not the large white area. Please also make sure you send your question to "Everyone" and indicate which presenter your question is for. Presenters will be unable to answer your questions during their presentations, but I will start off the question and answer session with the questions typed into the chat box. Once we get through all of the questions that have been typed in, the Operator will give you instructions on how to ask a question over the phone. If you think of a question after the seminar, you can send it to the presenters directly, or I encourage you to use the Freight Planning LISTSERV. The LISTSERV is an email list and is a great forum for the distribution of information and a place where you can post questions to find out what other subscribers have learned in the area of Freight Planning. If you have not already joined the LISTSERV, the web address at which you can register is provided on the slide on your screen.

Finally, I would like to remind you that this session is being recorded. A file containing the audio and the visual portion of this seminar will be posted to the Talking Freight Web site within the next week. We encourage you to direct others in your office that may have not been able to attend this seminar to access the recorded seminar.

The PowerPoint presentations used during the seminar will also be available within the next week. However you can download the PowerPoints right now from the lower right corner of your screen. There's a file share box where you can download the PowerPoint with directions above that box on how to download them. Please make sure your pop off blockers are turned off if you try to download the presentations as a new browser window does open. I will notify all attendees of the availability of the PowerPoints, the recording, and a transcript of this seminar.

We're now going to go ahead and get started. Today's topic, for those of you who just joined us, is Accounting for Freight Benefits in Transportation Projects. Our first presentation will be given by Michael Fischer of Cambridge Systematics. As a reminder, if you have questions during the presentation please type them into the chat box and they will be answered in the last 30 minutes of the seminar.

Michael Fischer:
Okay, thank you, Jennifer. As Jennifer mentioned I'm going to be talking today about a guide book that we developed for the U.S. Department of Transportation on how to conduct economic impact analysis of large scale freight investments, and before I begin, I just want to acknowledge my teammates on that project, economic development Research Group which did quite a lot of the work in writing the guide book on economic modeling techniques, and also Boston Logistics Group which contributed a lot to the Supply Chain analysis components of the guide book.

So, the presentation I'm going to make today will cover the topics indicated. I'll start off with a little bit of background on the guide book and the purpose and what its economic impact analysis all about anyway and then I'll move from there into a description of the basic structure of the guide book which includes a five step process for conducting economic impact analysis. Then, I will talk briefly about a case study that we included in the guide book on the Baltimore rail tunnel program in Maryland, and how the framework was used to describe how that analysis might have been enhanced beyond what analysis was done by the Maryland DOT and their consultants, and then I'll conclude with just a brief overview of a tool box and what's in that for economic modeling and impact analysis tools that you can get access to through the guide book. And I will also provide information on how to get a copy of the guide book.

So, what the is economic impact analysis? Well, as you know, there's been a lot of interest in how freight investments affect the economy of regions, states, and the nation as a whole. Sometimes freight investments are actually made specifically to encourage economic development or to protect the competitive position of a State or a region, and understanding extra regional impacts is often an important feature of how justifications may -- how jurisdictions may justify partnerships between a State and Federal Government. So, that was kind of the motivation behind this guide book was to develop techniques that the were common, that could be used across the country.

So in the guide book, we look at economic impacts of freight investments proceeding through a flow of effects. We start out with an investment that effects the transportation system performance and those changes in system performance are often measured in terms of things like travel time, changes or reliability or throughput of the system. Then, businesses translate those transportation performance improvements into economic impacts at the firm level, such as reducing their cost, changing their output, or changing their profitability pictures, and then in the aggregate, those roll up into impacts on the macro economy of regions, states and nations and we want to capture all of that if possible in the economic impact analysis.

So, the focus of this guide book is on large projects so there's a concern about national scale of benefits and making sure that we differentiate between national, local, and various geographic scales of benefits. There's also a focus on public vs. Private benefits and an accounting for those which can become important in how costs are allocated for the purposes of Financing projects, and then also, there's an attempt in this guide book to address the question of how do businesses reconfigure their logistics and Supply Chains to take advantage of transportation improvements and what does that mean in terms of economic effects.

Now, there are a few challenges for evaluating large scale projects and I want to mention a few of these. Typically, these are projects that because they have economic development effect at a fairly large scale, they require a public benefit consideration, so understanding the difference between public and private benefits is important. These large scale projects are often for major freight facilities that have national level significance, based on the disbursed pattern of the freight trip orange ins and destinations using the facilities and they involve costs at a geographic scale beyond the jurisdiction of a local and State government and potentially may involve federal funding considerations.

The proposals often involve multiple modes of travel. That complicates the analysis of capacity needs and benefits since there can be numerous alternative freight options across the modes and it also complicates benefit cost comparison because some of the modes involve public roles for funding facilities and operating services while others may involve private ownership.

And then most of the proposals for the freight projects, because they have both public and private sector benefits and costs, it's particularly difficult to assess the size and incidence of benefits and then the funding responsibilities that that implies.

So to start thinking about how to conduct this type of analysis, in the guide book that it was useful to bring out some of the important costs and impact perspectives, who are the people or the groups that are stakeholders that are impacted by these investments and how are they impacted?

So, we start in this chart with the carriers and because many impacts on system performance are first encountered by the carriers. They're the ones that will first encounter direct travel time benefits, cost changes, reliability improvements and accessibility or safety benefits and how they pass those benefits on to their customers often affects the total economic impact picture.

If competition a among the carriers within or across mode s exists, then those benefits are typically passed on to shippers and they're often the real beneficiary of time savings and approved arrival time reliability. They can further benefit if they are able to reconfigure the scale scheduling the characteristics of their operations and the logistics processes they use over the long run and Rob will be talking a bit more about that later.

The industries and Markets that those shippers exist within, who they buy from, who they sell to, that whole pattern of production distribution and sales can be affected in the second round of benefits or impacts and that needs to be taken into effect, and then there are non-freight impacts , the total economic development impact on a region, what new jobs are created in industries, what new industries may be attracted to a region and then lastly, there's other public impacts which may include impacts -- income for workers, changes in price levels, new safety and security and environmental benefits. We don't cover all of those in the guide book but we do try to capture most of them.

So, the guide book lays out a five step process, rather than identifying or developing a specific one size fits all type modeling approach, what we've done is developed this framework and then identified different types of modeling tools that can be used to implement it.

The five steps in the process are laid out in the next two slides. First step is to classify the type of project and this typically is where we first identify what the transportation impacts are likely to be, so here, we're concerned with things like what type of facility is being affected, where that facility is located in the transportation network, what modes are involved, what change in transportation system performance is being sought, and what's the specific type of investment that's occurring.

In the second step, we define what are the relevant evaluation issues and here is where we begin to identify what are the important economic effects that need to be captured in the analysis. So, we identify whether there's a national or international scale of the impact, whether the project is going to improve economic competitiveness, accommodate growth, change productivity or encourage trade. If the benefits are just specific regions, modes, or industry sectors, and what the allocation is among the affected parties.

Then, with Step 3 and 4 and 5, we really start to get into the analysis itself, having to find the relevant issues. Step 3 deals with tools for calculation of transportation impact and this addresses network and terminal analysis and simulation and the types of models that are used to identify performance improvements, types of facility handling changes or changes in logistics systems.

The fourth step then once we determine what the transportation system impact, performance impacts are, we then have to translate those into economic benefits and economic effects, and we talk about the form of the economic impact, what has changed in the economy or the economics of an individual firm, what's the geographic, the geography of the impacted Markets, distribution of effects and the types of models that are used to measure that, and then lastly, we take all of that and identify a series of different types of decision methods that can be used.

The basic data requirements for implementing or for analyzing a project fall into these two major categories, transportation impact data and economic evaluation factor data. In Step 1, in classification of the type of project, we require a description of the network supply conditions r for scenarios representing conditions both with and without the project, and this will include data on things such as access capacity, speed, and cost by mode, and then in the third step, we need information about travel demand patterns and this will include information about volumes of vehicle flows by commodity and mode and information about vehicle miles traveled, vehicle hours traveled, variability in travel times, and various other types of shipper impacts.

On the economic side in the second step when we define the evaluation issues, we need to identify where the desired transportation and economic performance measures which would include changes in national freight capacity or level of service and change and the implications that would have for economic competitiveness growth, productivity, and trade, and then we need to define what are the economic value performance indicators which would include changes in cost, economic growth, income, employment, and other measures such as that.

The basic analysis components are illustrated in this flow chart, and they do proceed through a baseline demand and supply characterization of the system, changes in freight transport performance and access and then translating that into economic impacts, impacts on the overall economy and the decision analysis and there are a series of different types of models and tools that are discussed in the guide book that can be used to conduct these analysis.

Transport models that we discuss in the guide book include network and terminal performance models which include traditional travel demand models and terminal simulation models, and then we also discuss models for use in conducting diversion analysis which would include models such as logistics cost models and other types of traditional mode share models that the are more a function of cost and service characteristics of the modes.

The economic models that we discuss in the guide book include techniques for monetizing the direct use or benefits so for example, when there's a change in travel time, what's the value of time and what's the value of that benefit to the direct user, but then we also describe other types of economic modeling tools, business process models that can be used to analyze changes in factor costs or predict changes in the firm economics, market access models and business traction retention models, and then economic simulation models such as general equilibrium models and other types of dynamic simulation tools to look at the more aggregate macroeconomic effects.

So now I'm going to describe each of the steps in a little bit more detail and then hopefully have some time to get into the case study. As I said, the first type of, the first step is to define the project type and here, we're concerned with the functional activities that are going to be affected by the project, what type of facility is being affected, for example, is the impact on a corridor, is it on a terminal facility, or is it in a, at a gateway facility like a port or a border crossing. And then we want to identify what type of improvement is being made, so for example, we created four categories of types of improvements. Those that affect link capacity expansion, those that would affect terminal capacity expansion, operational improvements and improvements that affect connectivity either between modes or facilities.

And then lastly, in this step, we define what are the relevant transportation benefit metrics, things like faster average travel time, lower travel cost, higher reliability, greater cargo capacity throughput, improved safety. And in the next several slides, I'm going to show you some tables or samples of tables that are included in the guide book that help the Analyst identify what are the types of projects that they're analyzing or what are the relevant effects from a transportation system performance perspective that they need to be concerned with and we went to great pains to try to identify all of the different types of freight investments that people were interested analyzing from various projects that we were aware of and literature that we had reviewed, and so this shows you the examples of different types of capacity expansion projects that could be accommodated with this approach and the modes that they apply to and you can see that we have examples for all of the different modes. Terminal expansion projects, what are the types of operational improvements that might be considered, and connectivity improvements.

And then in the next slide, we take that one step further and say, for each of these different types of projects, then by mode, what are the relevant transportation benefits that are being created and what are appropriate metrics for assessing those transportation system impacts. And this is a more detailed version of this table is included in the guidebook.

The next step in the process is the definition of the evaluation issues from an economic perspective. First thing that we want to consider is who are the issues and or what are the issues and what are the audiences that need to be addressed, so what's the response to a problem that the project may have resulted from, so for example, is this a project that was being developed because there's constrained growth on a facility in a region, a region is becoming uncompetitive or there are external impacts associated with growth, say environmental effects as a result of port growth.

Then, we also want to understand what are the underlying motivation of the stakeholders, what are the financial concerns of the businesses that are being affected by this facility, what types of changes and shipping patterns and practices are desired, what changes and cost competitiveness of services, for example, and what are the ultimate stakes for the community? What are the economic changes for service providers, impacts on key freight user industries, impacts on the general economy, to what degree are these all-important in the analysis.

We want to distinguish between those issues that have a national character an those that have a local character. We want to understand incidence of benefits and costs and how that affects the choice of metrics and affects who pays or who maybe contributing to a projects financing.

And then lastly, we wanted to find what are the appropriate alternative impact metrics on the economic side so we have direct metrics which are the transportation metrics that we talked about in Step 1 but also now intermediate business impacts on productivity, wages, capital investment, and macroeconomic measures like GDP, employment, and income so with step one and two completed we've pretty much set the stage of what's the analysis going to look like and now we get into actually conducting the analysis in Steps 3, 4, & 5. The first step of those, Step 3, is the implementation of transportation impact tools and these are the types of tools I mentioned most of these earlier so I won't go into them in a lot of detail here, but we do need to identify transportation efficiency benefits that are developed and typically that involves the network models and the terminal simulation models to determine that. We look at mode specific performance analysis and introduce concepts of non-traditional metrics so you'll see there's a lot of discussion in the guide book on reliability and what the economic implications of that might be, and we do discuss diversion analysis techniques and the treatment of carrier and shipper costs, because we provide approaches and guidance for how to determine the relationship between changes and a carriers cost and how these are passed on to shippers.

And the final results of that analysis which are going to then be used to drive the economic analysis in the next step should portray how proposed changes in network and terminal facilities affect the system performance by mode which include changes in average travel times, flow volumes, shipping costs, reliability and other metrics that you see here. They must show the volume of freight that's affected and they must show how these benefits are translated or these system performance benefits are translated into benefits for freight shippers. This last part of the box on this chart which is then going to drive economic analysis in the next step.

So, Step 4 involves selecting and applying economic impact tools and one of the approaches that was suggested is to do a tiered analysis, to do a first rough cut estimate of overall economic benefits to determine whether a more detailed and comprehensive economic modeling solution is warranted or whether a more simple sketch planning type approach is more appropriate. In this step, we would always be translating time, reliability and cost impacts by mode and trip purpose into effects on productivity and competitiveness of effected sectors of the economy, translating access impacts into effects on feasible freight delivery Markets and feasible to from intermodal and port facilities so we get an idea of how that's changing and what that means in terms of market expansion and growth and translating commodity cost and access changes into industry competitiveness and market impact at regional, national and international levels.

We can then plug that information into a more comprehensive macroeconomic model, if appropriate. We also talk about interest reorganization effect. I'll talk about that a little bit later, the approach that we used in the guidebook and Rob is going to be discussing some other approaches from the work that he was involved in. The types of economic models that might be used at this step would include input/output models to look at sectional impacts as the direct user benefits flow through to second and third order sectors in the economy, market access factor models which will take into account how changes in market and supplier access do affect competitiveness of individual businesses and dynamic simulation models, examples that you might be familiar with would be like the Rebie model.

Just moving on now to show how this looks in terms of portraying results and measuring these impacts, we start out with a breakout of impacts by the relevant geographies national impacts distinguished from local and regional economic impacts and you're looking at here how reduced transport costs and logistics costs and business market expansions when Fed into the economic models will result in metrics such as changes in export/import levels, total U.S. Output, GDP value-added measures, personal income, and employment would be another typical output, and in this table, and you can see in the next table as well, you'll note that there are some footnotes here which indicate in this slide what are the types of economic models that would be used to take these inputs and come up with these final outputs and metrics of overall economic effect, and there's a pretty extensive discussion of that in the guide book.

One of the innovative approaches that we try to get at in this guidebook at least to make a first cut was what might happen in terms of second and higher order effects in terms of changes of logistics, processes as a result of changes in transportation systems and this is, there's been quite a bit of work now done that suggests that simple benefit cost analysis approaches that don't take these logistics changes into effect are certainly underestimating the potential economic impacts and benefits of freight transportation improvements and in this project, we brought into our team, Boston Logistics Group which is a Supply Chain consulting firm. They used information from across a whole range of their clients to look at how transportation improvements of different types affected the Supply Chain characteristics of their different customers and then categorized those by Supply Chain type and impact type to determine what the likely additional benefit beyond the direct user benefits say of reduced travel times might be in terms of additional economic impact on these firms.

This table, which was taken from the report, shows some of the types of Supply Chain impacts that would result from cost reductions, capacity increases, or other types of secondary effects, both expressed in terms of percentage change and operating cost and percentage change in transportation costs, or benefits as a percentage of transportation cost. , And I'm not going to go into this in much detail. There's a whole appendix of the guidebook that talks about this whole topic, but one of the interesting things that Boston Logistics Group did was to develop a classification scheme for different shipper types in terms of the dimensions that you see in this chart here which include production strategy, which is across the top, the flow or continuous production strategies versus batch or cellular production strategies, the transportation mode that's used and again, here you see vessel or rail, truckload or intermodal, light less than truckload, as different types of modes. The order trigger, whether the order is being, it's a make to plan, make to stock, a assemble to order, make to order or engineer to order, and the breadth of coverage between the raw materials supplier and the end consumer which is shown on the bottom of the chart and there are six different Supply Chain types that are then fitted within this structure and for each of those Supply Chain types, the guidebook provides a factor that can be applied to the basic results and I'll just flip back to the previous slide and modify these percentage changes that might result from a change in transportation costs or system performance. And changes those, modifies those to reflect the characteristics of these different Supply Chain types so if you know something about the types of industries that are affected by transportation improvement, you can determine how at least a rough cut estimate of what the logistics benefits, the logistics cost benefits would be.

The last step in the process is to select and apply the decision models and in this step, we first look at alternative views of benefits. We need to relate the benefits to the policy objectives for the project and that's going to tell us something about what types of decision models should be used whether we want to be looking at a benefit cost analysis or a cost effectiveness type approach or a more global type of economic impact analysis, and we describe benefit cost calculation procedures and how to present those results and we also discuss how to deal with the incidence and equity of benefits and costs as a feature of the decision analysis.

Now, I'm going to skip to a case study here and I'll try to go through this pretty quickly because I know I'm running out of time, but basically, what was done as part of the guidebook was we took an actual project example which was the Baltimore rail tunnel. This is a case which some of you may had be familiar with, where there's a series of tunnels through the Baltimore area and a rail system, this was conditioned or sort of brought into focus with the Howard Street tunnel and what the potential vulnerabilities of that system would be and this study looked at a variety of different alternative ways of addressing capacity issues in that corridor.

So the type of project was that it was link level tunnel and track improvements to increase capacity and reduce delay , and a benefits analysis had been conducted by the State of Maryland focusing primarily on benefits to the State of Maryland, businesses in the State. This analysis then, we did in the guidebook took the framework and extended the analysis that had been done previously using that the framework and it extended it across several different areas. We looked at existing freight rail benefits from reduced travel times and removal of bottlenecks but looked at all freight rail users in the corridor, not just those that were Maryland based.

We looked at how that had shipper cost savings that the would result in changes, shifts in mode share from trucking to freight rail. We looked at highway user benefits for the non-freight users , and as well as freight users and we looked at passenger rail savings to the am track trains that were using the corridor and then Incorporated the Supply Chain benefit approach that I described a little bit earlier and conducted a full benefit cost analysis of the project.

What we were able to show in this was in this rather ugly slide that that did make some significant changes in the results. This slide also shows some alternative scenarios that we analyzed using some assumptions about what the average length of hall was for trips that the could be diverted from truck to rail and how that affected the analysis, so again, in the interest of time I won't go into a lot of detail on this. There's a rather detailed discussion of the various techniques and methodologies and models that were used to calculate these benefits in the guidebook itself.

We also commented on ways that the analysis could have been extended further to fully take advantage of the framework and the tools that are available in the guidebook. One thing that was not done was we did not analyze commodity traffic. We looked at total flows by commodity group but we didn't differentiate between the different train types that might be used to carry different commodities in the rail simulations that were done. That would potentially result in slightly different outputs with respect to how transportation system improvements would be realized by the different commodities given that the different train types would have different impacts on capacity utilization.

We did not use a service or cost based mode all diversion model. It was a fairly simple approach that just said certain commodities that do travel by rail and that origin destination payers that the have a long enough distance to make them feasible by rail, we would try, we would assume that we could maintain existing market shares by rail with these improvements and an alternative approach that looks at service characteristics and cost characteristics of rail and trucking in that the corridor would provide a more precise estimate of modal diversion opportunities.

And then we use the highway economic requirement system, the HERS model to come up with rough estimates of highway user benefits based on overall travel time savings, but if a full network travel demand model were used, we could come up with a more detailed estimate of travel time savings and could have applied some of that information in a variety of tools that are described in the guidebook to look at issues like reliability, crashes and emissions and then finally we did a benefit cost analysis with the project information but did not run a full economic simulation to estimate gross regional or State product impacts and an overall employment impact and again this would be the type of additional analysis that you would want to do if you were doing a full analysis for a large scale freight investment.

And I'll just close here with an overview of the tool box and in addition to describing this framework, the guidebook also includes a rather extensive set of citations and bibliography of different types of modeling tools that are available and how to get a hold of them. Those that are free and those that are not, and the types of tools that are listed in the toolbox include freight network and terminal performance models, mode all diversion and logistics cost models, cost and access benefit calculator tools, economic simulation models, and a variety of decision support tools and they're all pretty well documented for your use in the tool box.

So, I'll just close there and just point out that copies of the guidebook are available on the DOT website at the URL indicated and that if folks have any questions feel free to contact me and my e-mail contact information is listed in this slide.

J. Symoun:
Thank you, Michael. Again, if you do think of questions for Michael, please go ahead and post them into the chat area and we'll get to those at the end of the seminars. I'm going to bring back up a slide at the end of the seminars that has the URL for the guidebook so if you didn't get a chance to get it just now, I will be bringing the address back later. We're now going to move on to our next presentation given by Rob Mulholland of ICF International. Rob you can go ahead when you're ready.

Rob Mulholland:
Okay, thank you, Jennifer. And just to sort of follow-up on some comments that Michael made, to put this into context, whereas he described a fairly elaborate framework for evaluating a transportation project, I will be discussing a specific tool that could be used as part of, as one of the analytical models incorporated within a frame work like that, that Michael described.

So, today, I will talk a little bit about some work that we've done over the last eight years and when I say "We" that "We" includes the Federal Highway Administration, ICF and HDR, who have been partners for about eight years in this project taking it from conceptual stages to now where we have a tool developed that can be used in the transportation planning process. So I'll talk a little bit about project evaluation in general, infrastructure and its relationship to the economy, and then we'll talk specifically about this study, identify the project scope, the theoretical framework that supports the tool and then the process of developing a tool that puts numbers to the theory and ultimately the production of a tool that can be used in the planning process.

From the start, let's assume as a given that transportation planners should seek to maximize the return on infrastructure investment. Okay? Seems logical enough, and given that - benefit cost analysis is a critical tool in the investment decision process. Benefit cost analysis models have been around for a long time. They're fairly well refined and a proven reliable tool but we felt that they have some limitations that could be addressed through the addition of models that enhance the benefit side of the calculation.

Specifically, benefits that arise from transportation infrastructure improvements accrue over time and benefit cost models in existence today do a very good job of capturing short- and medium-run benefits but do not capture some of the long-run benefits associated with the reorganization of Supply Chains in response to transportation system improvements.

A little more specifically, infrastructure investment decisions affect system performance in that improvements affect the efficiency with which freight moves through the system in the form of velocity, cost and reliability, and that affects the productivity of transportation and the Supply Chain in general, in other words the same amount of input creates more output, or fewer inputs are needed to produce the same outputs. When productivity improves, economic expansion becomes possible as businesses will change their operations in response to changes in production costs and output will increase.

So, the thinking is that with a new methodology that could capture these long run benefits that accrue over time through freight reorganization, current BCA models could be improved or enhanced. I'll talk a little bit more specifically about the way that the benefits accrue and also the way the framework seeks to capture those benefits.

And then ultimately, if we could identify tangible economic benefits associated with improved freight flow and incorporate it into a tool that would assist the planning process, then the planning process could take a step forward in that it could more accurately estimate benefits over the long term.

So, the freight benefit cost analysis project, like I said, it started about eight years ago and some thinking was done on the theory that transportation, freight transportation benefits accrue over long periods and there are points at which demand shifts that are not currently captured by existing models. That was sort of the first step and I'll talk in a minute a little bit more specifically about that theory but that was the first step in the process.

Once the theory was established and vetted through some internal processes and in Phase II, the national model was developed in order to test the theory. In other words, to see whether or not the theory was in fact true and if so, to attempt to first measure the benefits, the long-run benefits that had previously not been captured or even attempted to capture.

Following that, in Phase III of the study, the national model or those developed in Phase II was refined, expanded, and broken down into a regional model that can be used and is now in the final stages of production that can be used by planners to actually put numbers to theory for specific projects in specific corridors. And Phase IV is just getting under way and this is sort of part of that effort and that is the outreach and education phase. Now that a tool has been developed, we're in the process of sort of explaining it. The process through which it was developed and we'll be on hand to help with the implementation phase and also this is the first shot at the tool so we expect that it will be improved as we go forward, and so that's sort of an ongoing process that's now under way.

So, as to the theoretical framework development, the thesis is sort of as follows: Transportation infrastructure improvements enhance freight movement and produce economic benefits that accrue in the following forms. First, there is increased velocity and reliability, and that leads to reductions in transportation costs which in a free market are passed through to shippers. Productivity increases as well. I've talked about that a little bit earlier, and then the next step is sort of increases in Supply Chain efficiency, okay? As reliability and costs improve, markets expand, transportation and inventory balances change, overall production costs decrease, and further Supply Chain enhancements are made. Ultimately, volume increases as a result of reductions in production costs, Supply Chain evolution is discussed and also because reduced production cost also cause reductions in finished product prices and that increases demand for finished products which will also lead to output increases.

So if you look at these effects over the time horizon, what happens in the short run upon an improvement being implemented, shipper behavior won't change, at least in the immediate phase; however shippers receive an immediate benefit in the form of reduced costs and really, this is kind of a, we say shippers, but carriers actually receive the immediate benefit but assuming the market works the way it's supposed to, those benefits are passed through to shippers in very short order. In the medium run, shipper behavior begins to change, if the improvement is sustained, shippers will begin to buy more transportation, maybe scale back some of their inventories, perhaps source materials from different suppliers that previously were not available to them because of prohibitive transportation costs.

You know, at this stage in the game, shippers are still sort of feeling their way through the market and they aren't really willing to make wholesale Supply Chain changes or process changes. Over the long-run, however, as these improvements are sustained, shipper behavior will change and evolution will occur in the Supply Chain of particular firms and then in total, that will be sort of a phenomenon that's also existing on the macro level so inventory models, routing, facility locations and distribution patterns will change and new Supply Chain partnerships emerge, markets expand, and ultimately, the freight transportation demand curve will shift and I'll talk about that more specifically here in the next couple of slides.

This is a sort of a graphical depiction of the steps that I just discussed and I'll see if I can get this pointer to work here. Okay, this is a picture of let's say the market as it exists before an improvement is implemented. This represents the existing demand curve marked here by D-0 and prior to the improvement being implemented, the cost, the generalized cost per transportation unit was at C-0. Immediately upon the implementation of the transportation improvement, costs, generalized costs in the form of actual operating costs and also reliability, will go down from C-0 to C-1. Without making any changes in their behavior, shippers will realize then this benefit represented here as Box "a", so the quantity of transport purchased stays the same at Q-0, as the cost goes down, there's an economic benefit "a" that's immediately realized.

In the medium term, as we talked about, shippers will begin to change their behavior. They will buy more transportation because the cost is less and compared to other production costs like inventory carrying costs and so fourth, they will make some changes within that market, and that secondary benefit is represented here by triangle "b". Now, in the long run, firms will adjust to this change in the generalized transportation cost and will contemplate revolutionary changes in their Supply Chains and this happens on the firm level.

Now, when that happens, the processes are completely streamlined and reevaluated, there are wholesale changes to not only the transportation phase but the entire Supply Chain and at that point, the demand curve for transportation will shift, and that's represented here by D-1. There's a pivot point here and the demand curve actually shifts out which creates the opportunity for additional economic benefits, here depicted by this "c", and that is what we are seeking to capture with this benefit-cost analysis model.

The extra benefits that occur in the long run that are not captured using traditional models, so this next slide just sort of presents these same segments, so "a", "b", and "c" here from this slide if you can visualize those, boxes "a" and "b", like I said are captured, they're captureable using current BCA methodologies, however box "c" as shown in the previous slide, is not currently measured.

So that's sort of the theoretical framework. That was developed in the first phase and like I said, vetted through some pretty smart economic people. In Phase II, the challenge was to look at some data, figure out whether or not that was actually true and observable in the market, and if so, then could it be quantified? Well, it was found that demand elasticity can in fact be measured as a function of transportation cost and reliability, where transportation cost equals the rates or operating costs for shipping goods, it's the rates to shippers or the operating cost to carriers like we said in a free market should pass through.

Also as a function of reliability which can be measured as the level of highway performance for a given segment so all other things being equal as volume to capacity ratio decreases, velocity increases, delays reduce, and demand in the long run will shift.

So, using regression analysis, with data from 30 different highway corridors over eight years from 93-2000, the following correlations were demonstrated: First, there's a positive relationship between freight rates and highway performance measures so increasing highway congestion will lead to increases in shipping rates over a corridor, if you hold other variables constant. There's a negative relationship between demand for freight and freight rates, so increasing rates leads to reduced traffic over a corridor if other variables are held constant and finally, there's a negative relationship between demand for freight transportation and highway performance measures; so as highway congestion goes up, truck traffic will be reduced over a corridor holding other variables constant so this is nothing new from the theoretical framework, however at this point, there's some math that can be put behind it. The statistical analysis bears out that these are indeed true in the long-run.

So at the end of Phase II, it was determined through that analysis that there is a quantifiable relationship between transportation infrastructure improvements and long-run shipper behavior, specifically based on the national data in the long run, a 10% decrease in measured congestion (and we used volume-to-capacity ratio) along a particular corridor would increase freight demand by up to 1%. Now it sort of varied based on the statistical methods used but that's a general statement. Okay, so this is a measure of the shift in the demand curve over the long-run. Which ultimately led to a finding that traditional benefit-cost models may underestimate long run benefits by as much as 15%. And this 15% can be thought of as the ratio of benefit "c", this slide, benefit "c" compared to the sum of benefits "a" plus "b", so "c" equals 15% of the sum of "a" plus "b".

And that was the findings from Phase II. It's important to note at this point that 15%, that sounds great, right? But enthusiasm at this point needs to be tempered a little bit because, as you know, tools are only as reliable as the data that's being used in the evaluation process. Now, the 30 corridors that were included in the study were selected because they had significant freight volumes during the period, but however, there aren't all that many observation points in terms of corridors and time. The corridors themselves were geographically disbursed. There were differences between freight movement patterns and the East versus Central versus West, differences in commodity mix and so fourth and in addition, the corridors varied in length, structure, traffic volume, congestion, and so fourth, so while the results are defensible, the 15% figure needs to probably be taken with a grain of salt.

As for the specific data that volume-to-capacity data and delay data used in the analysis was taken from HPMS, and those are generally accepted and reliable data sources, so this isn't to indict the data itself but more sort of the level of data, the volume of data that was included in the observation points that backed up those figures.

Another key finding for Phase II was that the demand elasticity in the long run is smaller when generalized cost is low than when generalized cost is high and stated differently, demand is more sensitive to changes when congestion is high, okay? Obviously that's logical if there's no congestion, on a stretch of road and you improve the road, it's not going to do much to demand because the cost won't shift down much at all. It was already fairly inexpensive to move freight on an uncongested road and it still is. There's no shift in demand.

This is an important point because years ago, much of the highway system and the freight system in general was not so congested. Freight did move freely but now as we're faced with increasing congestion, small improvements in highway performance can lead to substantial shifts in demand and long-run benefits.

Another question that arose, a very important question at the end of Phase II was that okay, so assume that these benefits are real, it's proven so we can assume that and whether or not the 15% is a real number, we know it's in the ballpark. The next question is to whom do the benefits accrue, right? This is sort of a national analysis from the standpoint of planning, how do you factor this into a benefit cost analysis when considering where the benefits should be included and how much of the benefits can be included on a regional level.

There's a fundamental difference obviously between freight movement and transportation planning whereas freight moves over long distances, transportation planning occurs mostly on a local or regional level, so freight will tend to follow the path of least resistance and provide benefits that accrue over great geographic areas.

However, at the transportation network level, the freight transportation largely in this country is publicly owned and maintained, planning occurs at the local level, where historically, the primary focus has been on local passenger travel. In recent times, planners have become a lot more interested and aware of freight issues and incorporating them into the planning process. For that reason, this is good timing on our part in that there's an audience - the planners in that now that they have shown a real interest in evaluating freight, we're able to help them to do so.

This gets back to the problem of benefit accrual. At the end of Phase II, we sort of had one of those "So what?" moments. Yes, this is an interesting theory. You can prove that it's real. Here you go, it's 15% improvement, but how do you translate that into a useable and desirable tool for planners who are thinking about things in a local context? Without being able to translate this to a local or regional level, the framework really has little practical use, so a point after Phase II, the next problem that we have is how do you distill the key elements of this model and apply it on a regional level and make something that's useful and can be implemented in the real world.

So under Phase III, this next phase, HDR - our partners in this endeavor developed a tool that estimates freight demand elasticity and long-run economic benefits, with respect to highway performance for three different regions. East, Central and West, so the tool is based on an analysis of 59 corridors, the 30 from the original model plus an additional 29 and they're divided by geographic area and analyzed on a structural and performance basis, and over 12 years, so that the observation points were expanded by four years for this tool.

The tool is distributable and user-accessible. It's Microsoft Excel-based, it's a plug and play, 508 compliant module, complimented by a complete user guide and very shortly, it will be available for public consumption. Hopefully in the next month or so, it will be posted to the web and available for download, so anyway that's what we're going for but the tool is complete and ready to go. It's just a matter of getting the processes in distribution.

So, here it is. You plug it in, you get to the welcome screen, and it's just a very basic thing that shows you sort of that there is some items that need to be input, some are from a drop down, pre- existing menus and so forth. Once into the module, planners can provide project-specific inputs. Examples include segment information, the value of time they want to use in the analysis, operating costs, changes in travel time, and so forth, as a result of the project and if planners, they can input the data that they have and if they don't have data, then default values are included in the module for each of their specific regions to perform an analysis and also to run sensitivities to test whether or not data inputs are reasonable or not.

So this is what the input screens look like and this is actually two separate input screens that I've put on one slide, just for ease of presentation, but this one in the top left here includes some of the segment information inputs including like the State, the length of the segment, the baseline transportation demand in terms of daily volume and traffic on the road and so forth. Over on the bottom right there's a shot of another example of inputs that calculates value of time using various wage indicators and so forth.

And there are many more input screens that users will click through and input appropriate data. So, after the input phase is completed, you hit " Run" and the model will calculate outputs from an existing BCA model to determine the baseline demand of performance and the expected improvement and measure for each specific benefits which can be thought of as "a" plus "b" in our prior slide. And then after that process is completed, the regional elasticitys are used to estimate the long-run demand shift for the particular project and the accrual of benefits to the region. At that point, the ratio of the benefit "c", the long-run benefit to the "a" plus "b" is calculated and the reorganization benefit is added to the traditional benefit. So to show you graphically what that looks like, the tool calculates here block "a" is here in this square, Section "b" would be here and the demand elasticity is represented in this shift from demand-0 to demand-1, and the red area would be the long run benefit not currently accounted for by the benefit-cost model.

So taking the next step, you then would see an output for the model that looks like this. The blue pieces of these in the bar graph represent traditional, traditionally calculated benefits from the BCA modeling techniques and then the little red added benefit would be the output from this model that shows the additional economic benefit from long-run freight reorganization. So that's what I have today, like I said, the tool will be hopefully rolled out in the next month or so. The contact person at Federal Highways is Ed Strocko. Here is his contact information. He would be very happy to go over the tool with you and make sure you have it as soon as it's available and you'd like to get a copy. For questions about the presentation today, please feel free to contact me. It's a first-shot tool and we're constantly looking for ways in which it can be improved so please don't hesitate with any questions or comments you might have.

I guess that's it for me, Jennifer.

J. Symoun:
Okay, well thank you. I hope everybody enjoyed both of these presentations. I am not seeing questions typed in. Rob, or Michael has anybody sent any questions to you?

M. Fischer:
No, I just got one about getting a copy of a slide that was messy, but other than that, not really.

J. Symoun:
Rob, did you have anything?

R. Mulholland:
I don't see any and I don't have any in my personal inbox either.

J. Symoun:
Okay, what we'll do then is we'll open up the phone lines and see if anybody has any questions to ask over the phone, and also if you think of a question now feel free to type it in as well. If the Operator could give instructions on asking a question over the phone?

At this time if you'd like to ask a question please press star 1 on the phone. You will be prompted to record your first and last name. To withdraw your request, press star 2. At this time, there are no questions.

J. Symoun:
Okay, well, thank you. This is a first, it seems like we have no questions on this seminar, I'm guessing Rob and Michael just did a great job of presenting their topics and their presentations. I just brought up a slide on the freight peer to peer program, I just want to draw your attention to that. The peer to peer program is meant to facilitate information sharing between public sector, freight transportation professionals and provides free, short-term assistance, regarding freight planning and operations. You can go to the web address on the slide for more information or the e-mail address if you'd like more information on the program.

I also brought the introduction slide back up which has the link to the guide to quantifying the economic impact guidebook that Michael mentioned in his presentation as well as the link to the listserve and to register for future seminars.

If we don't have any questions, we'll go ahead and close out a little bit early today. I want to thank both presenters for great presentations, and thank everybody for attending today's seminars. The recorded version of the seminars will be available within the next week on the talking freight website and I'll send an e-mail out to everybody in attendance to let you know when the recording is available. If you didn't register in advance and you want to follow-up information, if you could just send me an e-mail so I can make sure I have your contact information.

The next seminar will be held on January 26 and is titled "Accounting for Freight Benefits in Transportation Projects." Please note that this seminar will be held on the second Wednesday of the month instead of the usual third Wednesday. If you haven't done so already, I encourage you to visit the Talking Freight Web Site and sign up for this seminar. The address is up on the slide on your screen. I also encourage you to join the Freight Planning LISTSERV if you have not already done so.

So with that, we'll close out. Thank you, everybody and have a great holiday.

Updated: 3/29/2011
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